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Digital Realty (DLR) Closes DuPont Fabros Merger Transaction

In a notable development in the data center REIT market, Digital Realty Trust, Inc. (DLR - Free Report) announced the completion of a merger with DuPont Fabros in an all-stock deal, for an enterprise value of about $7.8 billion. This move enhances Digital Realty’s portfolio in the top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley.

Together with the merger’s closure, former DuPont Fabros Board members — Michael A. Coke and John T. Roberts, Jr. — also joined Digital Realty's board of directors. They bring with them years of expertise in the real estate sector.

This acquisition of Washington, D.C.-based DuPont Fabros, operating 12 data centers in three major U.S. metro areas and 301.5 megawatts of available critical load, significantly boosts Digital Realty’s capacity to serve the top metro areas in the nation. Particularly, this buyout helps the company reinforce its hyper-scale product offering and widen its blue-chip customer base.

In fact, according to Digital Realty's CEO, the above discussed buyout is in sync with the company’s strategy of offering wide ranging data center solutions “from single-cabinet colocation and interconnection” to “multi-megawatt hyper-scale deployments.” Furthermore, per Digital Realty’s earlier press release, the combined company will have investment grade or equivalent customers representing more than 50% of total revenue.

Additionally, DuPont Fabros currently has six data-center development projects under construction. Situated in Ashburn, Chicago, Santa Clara and Toronto, where Digital Realty is currently present, the development pipeline offers scope for external growth. Moreover, the merger of the two companies is likely to result in efficient cost structure and drive industry leading margins.

Digital Realty also announced the early tender results for 5.875% senior notes due 2021 which were issued by DuPont Fabros. The company noted that holders of about $475 million worth had validly tendered and delivered their notes as of 5:00 p.m. EDT on Sep 13, 2017. This denoted around 79% of the $600-million aggregate principal amount outstanding. The amount paid for each $1,000 principal amount of early tender notes was $1,032.50, plus accrued and unpaid interest.

Data center REITs are experiencing a boom with the growing popularity of cloud computing, Internet of Things and big data as well as the use of third-party IT infrastructure by several companies. In fact, demand has been outpacing supply in top-tier data center markets and despite enjoying high occupancy, these are absorbing new construction at a faster pace. Amid these, Digital Realty also stands well to leverage on the growth potential with its strategic acquisitions and expansion efforts.

Digital Realty currently has a Zacks Rank #3 (Hold). Also, year to date, shares of Digital Realty have climbed 23.1%, outperforming 4.9% growth recorded by the industry.

While PS Business Parks and InfraREIT have expected long-term growth rates of 5% and 8%, respectively, the expected long-term growth rate for UMH Properties is currently pegged at 10%.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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